Investment Dictionary

EV/EBITDA Ratio

EBITDA Multiple

EV/EBITDA ratio shows how expensive firm is compared to its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EV to EBITDA multiple is mostly used by professionals because it is harder to calculate correctly but may show more accurate results than P/E ratio. Especially EV/EBITDA has an advantage when is used for companies that have large asset base and generates high cash flow.

Formula (Calculation):

* Net financial debt should include all liabilities that could not be assigned to working capital (usually such liabilities pay interests), minus cash and cash equivalents (or other financial assets that aren’t used in activity).

** EBITDA is for the last four quarters (or forecasted sales for current or next year).

When calculating this ratio, few aspect are needed attention. Currency of the market capitalization and sales has to be the identical. If results in income statement are provided in thousands or millions, you should adjust calculations to that.

Interpretation:

EV/EBITDA ratio has to be compared to similar companies. The lower the ratio is the better. If the ratio is lower than competitors’ that might mean the company is undervalued (also might be other reasons for that: maybe the company going to face some problems and EBITDA going to decrease in the future).

The main EV to EBITDA advantage against P/E ratio is that EBITDA ignores accounting differences and that is very good for international stock comparison.

Usually this multiple varies between 5 and 10. It might lower than 5 for decreasing or cyclical businesses, or might be higher than 10 for fast growing companies during the bull market. Normally similar companies (that work in the same niche) have similar EV to EBITDA ratio.

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